Sunday, 25 September 2011

With EDF Energy announcing price hikes in September 2011, the last of the Big Six energy companies joined the syncopated pricing goosestep stamping on the wallets of us ripped-off Britons.

All the companies concurred (surely not colluded?) in their main excuse – price hikes are caused by the rise in wholesale energy prices. We are led to believe that those drilling gas producers and electricity generators are inflicting heavy price rises on the poor old retail energy companies, who struggle to keep our bills down but are ultimately forced to kick them up.

“I know it hurts everyone when we put up prices and I wish we didn’t have to.”

The fact is the retail energy companies, who bill us, buy their wholesale gas and electricity from...you guessed it...themselves. The gouging generators, who snatch the coal and gas from the Earth and generate the wholesale electricity, are the retailers’ own conjoined twins. Each of the ‘big six’ are now able to supply virtually all their own needs. The graph below from OFGEM shows above the zero line how much energy the retail companies' generation twin can generate, and below the zero line how much energy the companies sell to the likes of you and me and the businesses that employ us. All six are more or less in balance – they can supply their own demands. [In the graph, RWE is the owner of nPower, SP is Scottish Power]

Forgetting that highwaymen don’t take your money because they are worth it but because they can, they overlook the other logical conclusion:

Bankers are paid loads more than me

I am as valuable as a banker

They should be paid loads less than they are

Executives across the land quickly realised the easiest way they can keep up with the bankers is to join in the ripping-off. Energy companies pushing up prices in-spite of record profits; telecoms companies fibbing about broadband speeds; suppliers ripping-off the government charging £22 for a 65p lightbulb. Even our much loved family doctors, finer fellows than those bankers, made a successful grab for a bumper payrise with a cunningly negotiated contract.

Bankers give one single prime reason for “having” to pay themselves grotesque salaries. They plead the need to recruit and retain the best of the best, to stem the 'talent drain'. Bankers argue that if it weren’t for the risk of them being tempted away by other even more grotesque salaries, they wouldn’t be forced into being so grotesque about paying themselves. It's not their own fault, it's the other bankers' fault.

So, is all this business about ‘the best of the best’ actually true? We can use mathematics, in the form of basic "teenager level" probability theory, to reveal all. With the help of some baboons, pictures compliments of the Wikimedia Commons, and some tweaking by ourselves.

If 100 baboons entered a contest to play a Bach fugue on the piano, would half of them be better than average? The maths will reveal all about both baboons and bankers.

Britons are already some of the most ripped-off in the world when it comes to rail fares. The UK’s railway is fragmented and up to 40% less efficient than its European counterparts, making it highly expensive to run. Passengers are paying the price for this inefficiency. Fares have been steadily increasing over the past twenty years, with some season tickets now costing the equivalent of a fifth of the average UK salary – and unfortunately it’s set to get much worse.

The government has decided to raise the cap on regulated rail fares from 1% above the RPI inflation rate to 3% above RPI from January 2012. Inflation is still running high, which means that tickets are on course to rise by 28% over the next four years, or over £1,300 more for some season tickets. With millions of workers facing pay freezes, rail fares are now increasing four times faster than wages – making the cost of doing a day’s work increasingly unbearable.

Government figures show that the planned fare increases from 2012 are likely to result in fewer people using the train. Instead of managing the railways as an essential public service, open to everyone, trains are in danger of becoming a luxury affordable only to the rich.

This isn’t just a problem for fed-up passengers. Access by affordable public transport to limited jobs is essential to the health of the UK economy, and reducing this access undermines the Government’s objectives of getting people back into work. We are running the risk of pricing people out of the labour market in London and our other major cities, and damaging the UK’s competitiveness in a global marketplace. Claims of ‘green government’ are also ringing hollow, as – even with high petrol prices – driving becomes the cheaper option than going by train.

By 2030, Britain will be back to levels of inequality last seen in the Victorian era if pay trends go unchallenged. The High Pay Commission’s recent interim report found that the top 0.1 per cent of earners will take home 10 per cent of national income by 2025 and 14 per cent by 2030 on the present trajectory.

The public is angry about the yawning gap that has opened up between rich and poor. In an ICM poll for the commission, 72 per cent of those questioned felt that high pay made Britain grossly unequal. Concerns are legitimate. FTSE 100 bosses are paid 145 times the average wage and, on current trends, this would rise to 214 times by 2020. Corporate leaders have seen their pay quadruple in the past 10 years, while average earnings increased at just 0.1 per cent a year.

Meanwhile, share prices dropped. This decoupling between pay and company performance is of great concern. In the poll, 73 per cent said they had no faith in business or government to tackle excessive pay.

There are strong moral arguments to make against inequality, not least that it creates an elite with access to a range of high-end private services and little concept of the difficulties faced by the public during economic austerity. But there is also a strong economic argument against devoting the lion’s share of rewards to those at the top: it is a very inefficient allocation of resources. Wealthy people tend to save more of their income, which means there is little trickle-down to the rest of society. If the spoils were divided more equally, those in the “squeezed middle” would spend more and help get the economy back on its feet.

Thursday, 1 September 2011

The director general of the Confederation of British Industry in an interview on Radio 4’s Today Programme, on 31/8/2011, commented that all the “over 240,000” members of the CBI – who come from just about every industry in Britain from banking to bolt-making – oppose plans to reform bank regulation at this time.

When Evan Davis, presenter of the Today Programme, suggested the CBI director general, John Cridland, is a paid spokesman for the banks, Cridland responded:

Reforms that Cridland describes as “barking mad”. To suggest there is “no division” for such a diverse group smacks of a North Korean election result. Perhaps it reflects the fact that the CBI’s idea of representation bears the hallmarks of the advisory panel of the Dear Leader, Kim Jong Il, which includes his long dead dear dad Kim Il-Sung in his role of “Eternal President”. As can be seen by the constitution of its Charimen's Committee which drives CBI’s policy:

According to the CBI website, the CBI Chairmen’s Committee “takes the lead responsibility for setting the CBI's position on all policy matters” and comprises at least 10% representing SMEs.

Evidently small and medium businesses are poorly represented on the policy making committee of the CBI. The key point of contention the CBI has joined up with the British Bankers Association to oppose is the ‘ring-fencing of retail banks’.

The big banks and their acolytes have a whole legion of reasons why ring-fencing is not a good idea. Their pronouncements go on about how things will be worse and more expensive for the likes of you and me and the butcher, baker and candlestick maker. Commentators from august organs such as the Financial Times deny this. But they are not paid to bang on about it, lobbying, dissembling, and generally propagandising as their day-jobs. So it is the banks’ well paid voices that prevail, most importantly in Conservative Central Office.

Two key reasons why the banks don’t like the ring-fence:

It takes away one of the dirt-cheap ways they have of raising money to bet on risky investments: our deposits. The money from our monthly salaries and our saving, for which they pay us around 0.1% interest – and charge many of us £100s per annum for the privilege.

So long as their Investment Bank is tied to their Retail Bank, there will be an implicit guarantee that they will never go bust – the taxpayer will save them. This also brings down the cost of borrowing for the banks, because lenders to the bank know even in the worst case they will get their money back from the taxpayers.

Two things that boost the banks’ profitability. Bankers’ bonuses up, but we still get our measly 0.1% interest on our savings.

So what is the ringfencing all about?

Keeping things simple – a business is solvent so long as its assets exceed its liabilities. For a bank:

If people can't pay back their loans, (a mortgage or business crisis, or a country defaulting on its loans), or the bank's own proprietary investments fall then the banks’ assets fall, threatening the gap between assets and liabilities.